Tax — the non-explanation for the debt explosion

As noted earlier, domestic debt owed by the government of Bangladesh shot up in 2011. The popular story is that this is caused by the rental power plants — government is buying expensive electricity from the power suppliers, selling to the households cheaply at a subsidised price, and paying for the difference with the additional borrowing. That the rental power plants would have been expensive was always expected. But the debt has risen by considerably more than the World Bank estimates of the price tag of these plants.

So, what’s going on?

Let’s think this through systematically. Domestic debt can rise for two reasons: either because the budget deficit is higher, or because for a given deficit, foreign financing hasn’t come.

Is it possible that foreign financing has fallen in recent months? Maybe international agencies are not disbursing sums allocated for various ongoing projects? Or perhaps various bilateral loans have not actually materialised, but the government has already started work on the projects these loans were supposed to pay for? Unfortunately, I don’t have any monthly data for foreign financing, and therefore can’t explore this possibility further.

What about the deficit? Has it risen? This could happen either because the expenditure has run ahead of what the 2011-12 Budget envisaged, or revenue hasn’t materialised as expected. I have expenditure data until only August 2011 — not enough to make a call on whether expenditure was overshooting the Budget target. So that’s another for ‘check later’ basket.

That then leaves the revenue option. I have tax collection data until November — first five months of the financial year. Now, taxes account for about four-fifths of total revenue — so it is possible non-tax revenue may have tanked in recent months. But taxes themselves seem to be holding up. In the first five months of 2011-12, the government collected 316 billion taka in taxes, compared with 270 billion taka in the equivalent period in 2010-11. This is an increase of 17%, faster than the annual average of 15% in the past decade — see the chart below: red line decade average, blue bars yearly growth, black bar year-to-date Nov 2011 compared with a year earlier.

2 Responses

1) sky-rocketing grand-scale govt corruption. Not an issue to wave away. It is catastrophic in BD.

2) Hasina in charge of power ministry, rental plants were paid by govt with NO TENDER (smells of corruption). These plants – a) dont work, b) require 500 billion Taka Imported Oil to run (10 times the COST of power plants) per year, as they are run by fuel oil. (somebody is making good money with the oil imports !!)
This has not only drained the economy dry, it will drive banks & reserves spinning to zero, in a short time.

3) Foreign aid has plunged to record low – which leaves economy with little money to play with !!